A Comparative Analysis

of the Non-Performing Assets of Public

and Private Sector Banks in India
D Sreenivasa Chary*

Banks are obliged to repay the deposits to the public on due date with an embedded
option for foreclosure. They can also take preventive, remedial and legal measures for
recovery of loans. However, despite their best efforts, some loans become Non-Performing
Assets (NPAs) as they do not generate income. On the other hand, banks are required
to make provision out of the current year’s profits as a cushion against such NPAs. If such
NPAs become irrecoverable, the resultant losses are required to be absorbed by banks.
In this context, banks are required to maintain as much capital as required to meet the
probable loan losses. The Reserve Bank of India (RBI) issued detailed guidelines to banks
on classification of loan accounts and provisioning norms, called Income Recognition and
Asset Classification (IRAC) norms. The two important groups of banks in India are public
sector and private sector banks. The present study is an attempt to analyze the
performance of these two banking groups in terms of classification and provisioning of
their loan assets under standard, substandard, doubtful and loss assets as per RBI
guidelines. The study observes that private sectors banks are comparatively better in
maintaining standard assets and making adequate provision for the NPAs.

Introduction
Banking is defined as the business activity of accepting deposits from customers for the
purpose of lending and investment. Prima facie, it appears that banking business is luxurious,
because banks lend money to public from the deposits raised. The deposits collected by
banks from public are of two types: demand deposits and time deposits. Current and savings
deposits are called demand deposits. They are repayable on demand. Fixed deposits, recurring
deposits, daily deposits are called term deposits. They are normally repayable on expiry of
the period for which they are accepted. In reality, these term deposits also have the option
of foreclosure. It means the term deposits can also be closed by the depositors, as and when
they want, irrespective of the period of deposit. To put it in a nutshell, we can say that all

* Associate Professor, Department of Finance and Accounting, IBS Hyderabad (Under IFHE – A Deemed to
be University u/s 3 of the UGC Act 1956), Hyderabad, Telangana, India. E-mail: dschary@ibsindia.org

© 2021 IUP. All Rights Reserved.

76 The IUP Journal of Accounting Research & Audit Practices, Vol. 20, No. 4, 2021
bank deposits are repayable on demand. Apart from this, some banks resort to market
borrowings and use such amount also for the purpose of lending and investment. This is the
position of liabilities side of the balance sheet of banks.
Let us now see the assets side of the balance sheet. The amount collected by banks from
public and markets is used for lending and investment. Loans are given by banks for different
purposes, for different periods and to different types of persons. The borrowers are supposed
to pay the loan installments regularly. It is an ideal situation. The reality is that some people
pay regularly, and some people pay after preventive, remedial and legal measures of recovery.
A few loan accounts become sticky and non- recoverable. Such loans are required to be
written off. In such cases, can a bank ask its depositors to accept lesser than their deposit
amount, as the bank incurred loan losses? The answer is no. The bank has to bear the loss.
How do banks absorb losses? It is as a deduction from its capital and reserves. It is for this
reason that the Reserve Bank of India (RBI) insists the banks to maintain adequate capital
and reserves. Then the question arises: “How much capital a bank should have”? A layman’s
answer would be: that much capital which is at least sufficient to absorb bank’s probable
loan losses. The Basel Committee on banking supervision gave guidelines in this direction.
According to it, banks are required to maintain a Capital Adequacy Ratio (CAR) of 8%. CAR
is a ratio of capital to its risk-weighted assets. In India, as per RBI guidelines, banks are
required to maintain a CAR of 9%. RBI monitors the performance of banks on a continuous
basis. When a bank’s capital adequacy is less than the stipulated, and the Non-Performing
Assets (NPAs) are higher than the stipulated bench mark, RBI takes prompt corrective action.
If such banks do not improve their position, RBI declares them as weak banks and may even
stipulate “Narrow Banking” for them. It means that such banks cannot undertake usual
banking business activities. The scope of their banking activities is narrowed down. About
22 years ago, Indian Bank, UCO Bank and United Banks were declared as weak banks.
However, they made a turnaround and sustained their existence. Thus, the predicament of
the banks is that they are required to repay the deposits of the depositors as and when
required by them, whereas the borrowers may not repay the periodical loan installments on
the due dates or thereafter. In some cases, it is not uncommon that they do not repay at all.
Banks are required to absorb the resultant losses.

Income Recognition and Asset Classification Norms

Earlier, banks used to debit interest to loan accounts periodically on accrual basis, irrespective
of the fact whether the borrower paid the periodical loan installments regularly or not. Such
a practice resulted in the hike of interest head of account and as well the loan account
balances, disregarding the actual repayment of interest and loan installments. The Committee
on Financial Systems, chaired by Sri M Narasimham, recommended the introduction of
Income Recognition and Asset Classification (IRAC) norms, in 1991, to ensure that bank
balance sheets reflect their actual financial position.
IRAC norm stipulates bifurcation of loan accounts into performing assets and NPAs. As
per the latest RBI norms, a term loan is classified as NPA, if interest or installment is overdue
for a period more than 90 days. Thus, as per IRAC norms, banks recognize interest on

A Comparative Analysis of the Non-Performing Assets of Public 77

and Private Sector Banks in India
performing assets as income for the bank. Performing assets are called standard assets. NPAs
are further classified as sub-standard, doubtful and loss assets depending on the record of
recovery in the loan accounts, for the purpose of making provision. The provision rates are
presented in Appendix.
Thus, NPAs, on the one hand, do not earn any interest on the loan accounts, and on the
other hand, profit earned on some other loans/services is required to be used to meet the
contingent loan losses. The longer the period of overdue of the loan account, the higher
would be the amount of provision to be made.

Literature Review
Das and Uppal (2021) examined the NPAs and profitability of 39 public and private sector
banks for a period of 15 years (2005 to 2019) and opined that the NPAs have got negative
impact on the profitability of banks. They suggested that banks shall reduce the NPAs and
operating cost to increase their profitability.
Gaur et al. (2021) probed the causes for NPAs in the banks and developed a model with
bank-specific, industry-specific and macroeconomic variables to address the NPA problem.
Their research indicates that in India the NPA problem is time persistent and it can be
overcome by positive bank performance.
Sharma et al. (2020) conducted research on the impact of gross NPA on the profitability
of various public and private sector banks in India for the years 2006 to 2019, and observed
a negative impact between them. They reiterated the need for reduction of NPAs in banks
as they not only impact the banks but also the growth of the economy.
Misra et al. (2020) observed procyclicality and income smoothing by Indian Banks in the
Loan Loss Provisioning (LLP). They further observed that such procyclicality in provisioning
is more in public sector banks, when compared with the private sector banks.
Ozili and Outa (2017) conducted extensive research on LLP practices by banks across
the world. According to them, the LLP objectives are good, but its utility depends on the
assumptions of the model and the accuracy of the inputs. They opined that the LLP is done
by some banks as income smoothening activity for accomplishment of the regulatory
requirement.
Rajeev and Mahesh (2010) in their working paper examined the trends of NPAs in India
from various dimensions and opined that the awareness of impact of NPAs on the banks and
economy has resulted in significant reduction in their volume.
Kalluru (2009) explored the significant differences in the performance and risk-taking
capacity of state-owned banks, domestic private banks and foreign banks in India for the
period 1995-2007 using fixed effects and random effects models. The study did not find any
significant differences between the state-owned and domestic private banks. They further
observed that managerial discretion in provisioning does not necessarily generate LLP
estimates that reflect the true and underlying economic reality of banks’ credit risk exposure,

78 The IUP Journal of Accounting Research & Audit Practices, Vol. 20, No. 4, 2021
but rather managerial discretion in provisioning is strongly linked to income smoothing,
capital management, signaling and other objectives.
Ketkar and Ketkar (2008) studied the impact of various market and regulatory initiatives
on the efficiency improvements and profitability of Indian banks from 1992 to 1997. The
study observed the efficiency scores that all banks, irrespective of the pattern of ownership,
have in the post-liberalization era. However, the foreign banks were observed to be most
efficient, followed by the new private sector banks. The directed lending appears to have
affected the efficiency and profitability of the state-owned banks and nationalized banks.
Malik and Prakash (2008) studied the impact of new generation private sector banks on
the old private sector banks by analyzing the financial position of five private sector banks
as the sample for the period of 1998-2006. The study considered CAR, net NPAs to net
advances, business per employee, return on assets, net profit/loss as a percentage of total
assets and net interest income as the parameters to compare the performance of the banks.
The study observed that the new generation banks could impact the business of the old
private sector banks by means of their new entry with a clean state, adequate capital resources,
well-trained and professional manpower, and absence of non-performing loans in their books,
computerization and lean organizational system.
Mohan and Ray (2004) conducted a comparative study of the revenue maximization
efficiency of public sector and private sector banks in India for the period 1992-2000, using
the Data Envelopment Analysis (DEA). The study observed that public sector banks are
significantly better than the private banks in respect of technical efficiency, but not in
respect of allocative efficiency.

Objectives
• To analyze and compare the asset portfolios of public and private sector banking
groups in India.
• To study and compare the quality of loan assets in the selected banking groups.
• To appreciate the need for making provision on the NPAs towards the probable
loan losses.

Data and Methodology

The study intends to make a comparative analysis of the nature of NPAs and the provisions
made by the two banking groups in India; the sample consists of two banking groups: public
sector and private sector banks in India. The analysis is done on the basis of secondary data
for 16 years, from the financial year 2005 to 2020. The data is collected from RBI website
(https://www.rbi.org.in/) under the heading annual publications: Statistical tables relevant
for banks in India. The private sector banks are nowhere near the public sector banks in
terms of volume of business, branch network and other parameters. Hence, absolute figures
of data cannot become the correct basis for comparison. Hence, ratio analysis is also used to
compare the relative efficiency of banks.

A Comparative Analysis of the Non-Performing Assets of Public 79

and Private Sector Banks in India
 The research methods used in the analysis of the data are descriptive statistics, graphical
presentation, and statistical t-test to find out if there is any difference between the performance
of public sector banks and private sector banks in terms of loan performance.

Hypotheses
H0: There is no significant difference in the performance between public sector and
private sector banks with respect to NPAs and the provision thereon.

H1: There is a significant difference in the performance between public sector and
private sector banks with respect to NPAs and the provision thereon.

Results and Discussion

The study first conducts preliminary analysis using descriptive statistics and graphical
representation to compare the performance of public and private sector banks in terms of
NPAs.
T-test was conducted to verify whether there is any significant difference in asset classes
and provisions made by public and private sector banks in terms of percentages. The results
are given in Figures 1 to 6 and Table 1.

Figure 1: Standard Assets in Public and Private Sector Banks

Public Sector Private Sector

7,000,000
6,000,000

5,000,000
cr)

4,000,000
(in

3,000,000
2,000,000
1,000,000
0
2005

2006

2007

2008

2009

2010

2011

2012
2013

2014

2015

2016

2017

2018

2019

2020

Year

Note: It could be observed from Figure 1 that the percentage of standard assets of private sector banks in
the 16 years is above 94%, and in all these years, the percentage of standard assets of private sector
banks is either almost equal to or over the industry percentage of standard assets. The figure also
shows that the standard assets are consistently growing in private sector banks, whereas ups and
down are seen in the case of public sector banks.

Source: rbi.org.in (Statistical Tables Relating to Banksin India)

80 The IUP Journal of Accounting Research & Audit Practices, Vol. 20, No. 4, 2021
 Figure 2: Sub-Standard Assets in Public and Private Sector Banks

Public Sector Private Sector

250,000

200,000
cr)

150,000
(in

100,000

50,000

0
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020
Year

Note: The sub-standard assets of private sector banks in the 16 years, in terms of percentage, are less than
that of public sector banks and the industry average, except for the years 2008, 2009 and 2010.
Surprisingly, during these three years, only the sub-standard assets of public sector banks are lesser
than the private sector banks and the industry in terms of percentage. In all other years, it is either
higher or equal to private sector banks and industry. The figure also shows that the sub-standard
assets are consistently growing in private sector banks, whereas ups and down are seen in the case
of public sector banks. They are very high during the years 2018 and 2016.

Source: rbi.org.in (Statistical Tables Relating to Banks in India)

Figure 3: Doubtful Assets in Public and Private Sector Banks

Public Sector Private Sector

700,000
600,000
500,000
cr)

400,000
(in

300,000
200,000
100,000
0
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Year
Note: The provision rates are much higher in the case of doubtful assets. Such doubtful assets are higher
in the case of public sector banks in terms of percentage when compared to private sector banks and
the industry, except for the years 2009, 2010 and 2011. Moreover, such doubtful assets are very
high from the year 2016 to 2020. As far as private sector banks are concerned, the percentage of
doubtful assets is lesser than the industry except for the year 2011. In terms of absolute figures,
doubtful assets are higher in the years 2018, 2019 and 2017 in public sector banks, and in the years
2019 and 2020 in the case of private sector banks.
Source: rbi.org.in (Statistical Tables Relating to Banks in India)

A Comparative Analysis of the Non-Performing Assets of Public 81

and Private Sector Banks in India
 Figure 4: Loss Assets in Public and Private Sector Banks

Public Sector Banks Private Sector Banks

140,000
120,000
100,000
cr)

80,000
(in

60,000
40,000
20,000
0
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020
Year

Note: Loss assets warrant 100% provisioning. The loss assets in terms of percentage on total advances are
very high in public sector banks during the years 2018, 2019 and 2020. Same is the position in
terms of absolute figures also. During the years 2008 to 2017, the loss assets in public sector banks
are surprisingly lesser or almost equal to the loss assets of the industry and private sector banks.

Source: rbi.org.in (Statistical Tables Relating to Banks in India)

Figure 5: Gross NPAs in Public and Private Sector Banks

Public Sector Banks Private Sector Banks

1,000,000

800,000
cr)

600,000
(in

400,000

200,000

0
2005

2006

2007

2008
2009

2010

2011

2012

2013

2014

2015
2016

2017

2018
2019
2020

Year

Note: Gross NPAs of public sector banks are higher than the private sector banks and also industry, in
terms of absolute figures and also as a percentage on the total advances. Nevertheless, the gradual
increase of gross NPAs in private sector banks is also noteworthy.

Source: rbi.org.in (Statistical Tables Relating to Banks in India)

82 The IUP Journal of Accounting Research & Audit Practices, Vol. 20, No. 4, 2021
 Figure 6: Provisions in Public and Private Sector Banks

Public Sector Banks Private Sector Banks

300,000
250,000

200,000
cr)

150,000
(in

100,000
50,000
0
2005

2006

2007

2008

2009

2010

2011

2012
2013

2014

2015

2016

2017

2018

2019

2020
Year

Note: The results indicate that public sector banks are conservative in making provisions, whereas private
sector banks are comparatively liberal. In many years, it could be observed that the percentage of
provisions made by the private sector banks is even higher than that of the industry.

Source: rbi.org.in (Statistical Tables Relating to Banks in India)

It could be observed from the data that the percentage of standard assets of private sector
banks in the 16 years is above 94% and in all these years, the standard assets of private
sector banks is either almost equal to or over the industry percentage of standard assets. The
t-test results also reveal that there is a significant difference in the standard assets as a

Table 1: Performance Analysis of Public Sector and Private Sector Banks

Standard Assets

PSU PVT P(T<=t) Two-tail t-Stat.

Mean 94.15 96.96 0.0037*** –3.44

Variance 17.37 1.50

Pearson Correlation 0.80

Sub-Standard Assets

PSU PVT P(T<=t) Two-tail t-Stat.

Mean 1.77 1.04 0.0077*** 3.08

Variance 0.77 0.16

Pearson Correlation 0.025

A Comparative Analysis of the Non-Performing Assets of Public 83

and Private Sector Banks in India
 Table 1 (Cont.)

Doubtful Assets

PSU PVT P(T<=t) Two-tail t-Stat.

Mean 3.61 1.65 0.004*** 3.36

Variance 9.71 0.88

Pearson Correlation 0.88

Loss Assets

PSU PVT P(T<=t) Two-tail t-Stat.

Mean 0.46 0.35 0.1924 1.37

Variance 0.21 0.04

Pearson Correlation 0.73

Provisions

PSU PVT P(T<=t) Two-tail t-Stat.

Mean 24.02 30.80 0.014** –2.78

Variance 51.44 137.69

Pearson Correlation 0.73

Note: PSU and PVT indicate public sector banks and private sector banks respectively.
*** indicates statistically significant at 1% level; and ** indicates statistically significant at 5% level.

percentage of total advances between public sector banks and private sector banks as evident
from p-value of 0.0037. Percentage of standard assets to total advances of public sector
banks is significantly less than that of private sector banks. Variance of standard assets
percentage is also more in public sector banks.
The sub-standard assets of private sector banks in the 16 years, in terms of percentage,
are less than that of public sector banks and the industry average, except for the years 2008,
2009 and 2010. Surprisingly, during these three years, only the sub-standard assets of public
sector banks are lesser than the private sector banks and the industry, in terms of percentage.
In all other years, it is either higher or equal to private sector banks and industry. Null
hypothesis of no difference in the percentage of sub-standard assets to total advances between
public sector and private sector banks could not be accepted at 1% level of significance (p-
value of 0.0077 and t-value of 3.08). Percentage of sub-standard assets to total advances of
public sector banks is significantly more than that of private sector banks.
The provision rates are much higher in the case of doubtful assets. Such doubtful assets
are higher in the case of public sector banks in terms of percentage when compared to

84 The IUP Journal of Accounting Research & Audit Practices, Vol. 20, No. 4, 2021
private sector banks and the industry, except for the years 2009, 2010 and 2011. Moreover,
such doubtful assets are very high for the years 2016 to 2020. As far as private sector banks
are concerned, the percentage of doubtful assets is lesser than the industry except for the
year 2011. Significant difference in the doubtful assets between public sector and private
sector banks is evident at 1% level of significance (p-value of 0.004 and t-value of 3.36).
It is also observed that doubtful assets of public sector banks are significantly more than
that of private sector banks. Further, it is also observed that provisions of private sector
banks as a percentage of gross NPAs is significantly higher than those of public sector
banks.
Loss assets warrant 100% provisioning. The loss assets in terms of percentage on total
advances are very high in public sector banks during the years 2018, 2019 and 2020. Same
is the position in terms of absolute figures also. Interestingly, the study did not find any
significant difference in loss assets as a percentage of advances of both types of banks.
Gross NPAs of public sector banks are higher than the private sector banks and also
industry, in terms of absolute figures and also as a percentage on the total advances. As far
as the provision on gross NPAs is concerned, the analysis reveals that public sector banks are
conservative in making provisions, whereas private sector banks are comparatively liberal.
During some years, it is observed that the percentage of provisions made by the private
sector banks is higher even than that of the industry.

Conclusion
The analysis reveals that from the angle of efficiency, the performance of private sector
banks group is comparatively better than that of public sector banks as regards maintaining
lower levels of NPAs and making adequate provisions there against. The findings are useful
to the entire banking sector and also the RBI. The need of the hour is, RBI has to take
necessary steps to improve the performance of public sector banks in particular and the
entire banking system in general.

References
1. Das S K and Uppal K (2021), “NPAs and Profitability in Indian Banks: An Empirical
Analysis”, Future Business Journal, Vol. 7, No. 1, pp. 1-9.

2. Gaur D, Mohapatra D R and Jena P R (2021), “Non-Performing Assets: Drag for Stability
of Indian Banking Sector”, International Journal of Economics and Business Research,
Vol. 21, No. 2, pp. 235-253.

3. Kalluru S R (2009), “Ownership Structure, Performance and Risk in Indian Commercial

Banks”, IUP Journal of Applied Finance, Vol. 15, No. 8, pp. 31-36.

4. Ketkar K W and Ketkar S L (2008), “Performance and Profitability of Indian Banks in

the Post Liberalization Period”, May, pp. 13-17, in World Congress on National Accounts
and Economic Performance Measures for Nations.

A Comparative Analysis of the Non-Performing Assets of Public 85

and Private Sector Banks in India
 5. Malik G and Prakash A (2008), “The Impact of New Private Sector Banks on Old
Private Sector Banks in India”, Asia Pacific Business Review, Vol. 4, No. 2, pp. 64-73.

6. Misra R, Verma R and Biswas S (2020), “Determinants of Loan Loss Provisions: The
Case of Indian Banks”, RBI Bulletin, May.

7. Mohan T R and Ray S C (2004), “Comparing Performance of Public and Private Sector
Banks: A Revenue Maximization Efficiency Approach”, Economic and Political Weekly,
Vol. 39, No. 12, pp. 1271-1276.

8. Ozili P K and Outa E (2017), “Bank Loan Loss Provisions Research: A Review”, Borsa
Istanbul Review, Vol. 17, No. 3, pp. 144-163.

9. Rajeev M and Mahesh H P (2010), “Banking Sector Reforms and NPA: A Study of
Indian Commercial Banks”, Institute for Social and Economic Change (ISEC),
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10. Sharma S, Kothari R, Rathore D S and Prasad J (2020), “Causal Analysis of Profitability
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86 The IUP Journal of Accounting Research & Audit Practices, Vol. 20, No. 4, 2021
 Appendix

Provision Rates for Different Assets

Assets Particulars Provision (%)

i Standard A Agriculture and SME Sector 0.25

Asset
B Commercial Real Estate – Residential 0.75
Housing Sector

C Commercial Real Estate Sector – Others 1.00

D All Other Loans (Other than A, B, C above) 0.40

Market value of security, if any, maximum up to the extent Secured Unsecured

of balance in the loan account is called secured portion.

ii Sub Standard Asset (NPA up to One Year) 15 25

iii Doubtful Asset (NPA beyond One Year)

iv D 1 Doubtful up to One Year 25 100

D 2 Doubtful beyond One Year and up to (3) Years 40 100

D 3 Doubtful beyond Three Years 100 100

v Loss Asset* 100 100

Note: *A non-performing loan, irrespective of the period of NPA, is classified as loss asset if it is not
backed by any realizable value of security and is certified as bad and doubtful for recovery by the
auditors.

Reference # 09J-2021-10-06-01

A Comparative Analysis of the Non-Performing Assets of Public 87

and Private Sector Banks in India
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